Texas’ energy sector deserves smart tax reform

By Robert Bradley, Jr.

Published 5:59 am, Friday, June 20, 2014

Texas is the top energy-producing state in the nation for both crude oil and natural gas. In 2012, this sector contributed approximately $100 billion to the local economy — that’s greater than the entire gross domestic product of Australia.

This economic activity is expected to increase by nearly one-fourth in the next two decades, to $125 billion. But there’s still room for improvement. The Texas economy stands to benefit if lawmakers concurrently simplified the current tax code and lowered the corporate tax rate.

Last restructured in 1986, the federal tax code is now in desperate need of repair. In the past two years, former Senator Max Baucus and Michigan Rep. Dave Camp have each taken on the arduous task of overhauling the code, proposing their own plans. But now, Baucus has resigned to become ambassador to China, and Camp has announced plans to retire after this term.

Without these champions of tax reform in Congress, many assume that fundamental change is unlikely. But they have left behind plenty of solid ideas for future lawmakers to adopt, as well as plenty of examples of changes to avoid.

The Camp and Baucus plans rightly focused on reducing the tax burden on job creators and average Americans alike. Both would have lowered the excessive corporate tax rate now set at 35 percent. And Camp’s plan would have encouraged American companies to compete overseas by changing the way their foreign income is taxed. Expect these priorities to remain.

But both reform packages also eliminated provisions that encourage and enable productive energy investment. If implemented without simplification elsewhere, and without reductions in the base tax rate, such discriminatory measures would be bad for consumers in general and the Texas economy in particular.

For example, both the Camp and Baucus plans would limit the “percentage depletion” deduction. Acknowledging that energy production at any given site decreases over time, companies have long been allowed to claim a tax deduction reflecting that decline. This provision is only available to smaller energy producers.

Without the depletion deduction, it would be much harder for the energy industry to sustain older wells, even though such sites can continue to produce energy for 20 years or more. Eliminating the deduction would make it economically unfeasible to continue running many of these wells. Some would be forced to shut down, probably leaving that oil in the ground for generations. No well is forever, but convoluted tax policy should not be the reason for retirement.

Section 199 offers another manufacturing incentive that has been highly effective in increasing domestic energy investment. Between 2008 and 2010 alone, the oil and gas sector spent $156 billion annually on infrastructure investments in the United States.

This provision made it through Baucus’ reform unscathed, but Camp’s plan would have eliminated it completely. Repealing Section 199 would saddle companies with drastically higher upfront costs when choosing to build in America. According to the American Petroleum Institute, as much as $17 billion in oil and gas investment would be put at risk, affecting 165,000 jobs nationwide.

Higher taxes on oil and gas in piecemeal reform are detrimental because, once one accounts for state income taxes and taxes on overseas income, the energy industry’s effective tax rate is 44 percent, the highest in corporate America.

Every day, the nation’s oil and natural gas sector contributes around $86 million to the federal Treasury. In Texas, energy firms pay about $10.2 billion in state and local taxes every year.

Those who counter these numbers with arguments about “subsidies” should recognize that when it comes to per unit of energy produced, renewables receive 25 times the subsidy of fossil fuels. The energies that consumers naturally choose is, not surprisingly, taxpayer friendly too.

Targeted tax revision at the expense of oil and natural gas is a tax on Texas. All but 31 of Texas’s 254 counties are active producers of energy. And, oil and gas firms support more than half a million local jobs, at an average annual wage of about $155,000.

Oil and gas is a driver of the Texas economy. A simplified tax code that lowers rates promises to accelerate this growth and encourage additional domestic investment. But future code reform efforts need to be conducted carefully. Changes that discriminate against the oil and gas industry would put jobs and investment in jeopardy — both here in Texas and elsewhere across the country.

Robert Bradley Jr. is the CEO and founder of the Institute for Energy Research and the author of seven books on energy history and public policy. He blogs at www.masterresource.org.